These tax cut whispers are about to get louder

Bizarrely, abolishing the 50p rate remains top of the Chancellor's list.

With summer over, the skies are darkening in more ways than one. Economic forecasts, previously strong for this autumn, have long been heading south. Last week sharpened the sense of impending crisis. The FTSE has been shaken more violently than at any time since the paroxysms of early 2009. On Wednesday, unemployment stats took their biggest quarter-on-quarter leap since March 2009. The US and German economies are flat-lining.

Whatever your favoured explanation for our worsening economic plight, one thing is increasingly clear: the UK economy is propped up on pillows, in desperate need of a shot in the arm. It may not be fashionable to say it, but that shot needs to involve a pickup in consumption and domestic consumer confidence. Yes, that jars with the consensus narrative about the need to rebalance our economy towards exports and investment, away from domestic consumption. But in times like these there's no escape from the cold hard reality: household consumption still makes up two thirds of UK GDP. Whatever our need for medium-term rebalancing, domestic consumption will play the star role in either lifting the UK economy out of danger or pushing it over the edge.

You only have to look at the periods following previous recessions to see how far we are now wavering from the 'normal' path to recovery. Figure 2 in this recent blog post compares the four major recessions that have hit the UK in recent decades, looking at the path of household consumption from their onset. In each case, it was at around this point - 10 quarters on from the start of contraction - that the spark of consumer spending re-ignited. As would be expected following a "balance sheet recession"', our current path to recovery looks decidedly different. Today, consumer spending is not a rocket booster but a millstone.

This economic misery is being driven by the coincidence of two things: households are seeing their disposable incomes fall steadily in real terms at the same time as they continue to carry a massive burden of debt. That leaves them facing a stark choice. Either falling incomes mean less spending or households will have to eat into their savings or take on yet more debt. (New research from the Resolution Foundation out this week will confirm the startlingly poor savings position of Britain's low-to-middle incomes households and reinforces just how vulnerable millions of households are to any future rise in interest rates). Only a pick-up in real disposable incomes will gradually free us from this bind.

So how is this harsh economic reality set to play out in our politics? Amidst all the unpredictability, we can be confident about one thing: in the coming months the current Westminster chatter about tax cuts will become louder and more volatile. Expect arguments over timing, over who to target, the potential impact on consumer confidence and spending, and perhaps loudest of all, over how any cut could be paid for.

In macroeconomic terms, of course, any plausible move on tax will pale in comparison to the decisions the Bank of England makes on further quantitative easing. But in the context of a long squeeze on living standards, all political parties have long realised that the lure of a targeted reduction in taxes for at least some groups would eventually become irresistible. Deteriorating economic news may expedite this.

So what's on the agenda? Bizarrely, given the economic context, the abolition of the 50p rate remains top of the chancellor's list, with a review set to report in the autumn as cover for a move. Even leaving aside the glaring question of equity, there will be grave doubts about the economic wisdom of trying to stimulate the economy - however modestly - with a tax cut for the very richest. Whatever you think of the 50p rate (and polls show that the public think quite a lot of it) cutting taxes for those at the very top is more likely to see money flowing into high-end savings accounts and central London property. By contrast, tax cuts for the bottom half of the working population - in particular those low income households who are now spending every penny they earn - are far more likely to help the high street.

Of course, the chancellor must know full well that, on its own, a tax cut for the richest 1 per cent would be the final nail in the coffin of his claim that "we're all in this together". If that is Labour's hope, there is a good chance they will be disappointed. It's no surprise, then, to see recent Lib Dem briefings talking up the idea of reintroducing the 10p rate of tax, backed by a clear message that they want to support those struggling on low and middle incomes.

Such a move may seem far-fetched but it has a powerful political logic. Many Labour backbenchers would retch at the prospect of Tories jeering from across the benches, hollering that they have put right the injustice of Brown's 10p abolition. The Lib Dems would of course revel at the prospect of claiming that it is they who have dragged the government's tax strategy in a more progressive direction.

Could it prove possible to make any sort of move on both 10p and 50p? That would be a significant fiscal stretch. It will depend in large part on the state of the economy; though paradoxically, if things suddently get worse, measures that currently sound implausible could gain a new respectability. It will also depend on whether the Coalition is willing to raise compensating tax revenue in a way that doesn't tilt the economy downwards. For that reason it's significant that some Lib Dems are now briefing aggressively in favour of a wealth tax (as well as green taxes) - and that prominent Tories are pitching in their penny's worth, from outright hostility from some cabinet ministers to more thoughtful support from commentators.

Of course, as the debate heats up, other options will also rise to the surface. For all its economic and political superiority over a tax-cut for the very richest, there are reasons to question the reintroduction of the 10p rate. Some will argue, for example, that reversing cuts to tax credits would better target money to those most in need. The fiscal position, combined with an unwillingness to raise other taxes, may in the end scupper any move in the near future in any case. But wherever the debate ends up, one thing is already becoming clear as the summer wanes: this game of Westminster whispers is set to get a whole lot louder.

Gavin Kelly is Chief Executive of the Resolution Foundation. James Plunkett (twitter.com/#!/jamestplunkett) leads the Foundation's Commission on Living standards.

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What are the consequences of Brexit for the refugee crisis?

Politicians neglected the refugee crisis whilst campaigning – but they shouldn't now concede to the darker undertones of the debate.

In the chaotic aftermath of Brexit, the refugee crisis seems like a distant memory. Yet not even a year has passed since the body of a young Syrian boy washed up on a Turkish beach, shocking the world.

When campaigning for the EU referendum began, politicians neglected the crisis. Not because the situation had ameliorated, but because the issue had become strategically toxic. Nigel Farage's infamous poster aside, the Leave side preferred scare stories about economic migrants rather than refugees; the Remain side because the refugee crisis, more than anything else since its inception, highlighted the fragility of the ideals that underpin the European Union.

Many of the main issues aired in the course of the referendum debate were related to the refugee crisis, regardless of how little it impacted on them in reality; immigration, strain on public services, national identity. The refugee crisis became a proxy issue; implied, but not addressed, for fear of detrimental impact in the polls.

However, in his repugnant posters (it should be stressed, nothing to do with Leave campaign itself), Nigel Farage made explicit what he thought posed the greatest threat to the UK. Rightly, the posters have been condemned by both sides of the referendum debate, but the underlying suspicion of refugees it reflects has concerned many organisations.Their concern has only been exacerbated by the result of the referendum. The spike in hate crime compounds their fears.

Paul Dillane, head of UKLGIG, a charity that supports LGBTI asylum seekers to the UK, expressed unease at the reaction of his clients: “The asylum seekers I work with do not understand the decision that has been made – they feel vulnerable, they feel unwelcome. Yes the law hasn’t changed, and if they’re at risk of persecution, they will be protected. But they don’t feel like that now.”

Despite the troubling situation, the result of the referendum changes little when it comes to refugee law. “Refugee policy is shaped in London, not in Brussels”, said Stephen Hale, Chief Executive of Refugees Action. “The decision about how well we support refugees in terms of integration is a matter for the UK, not Brussels. The number of Syrian refugees we choose to resettle is a matter for the UK, not Brussels.”

Although the law may not have changed, from a diplomatic or political perspective, the same cannot be said. This does have the power to negatively impact legislation. Post-Brexit reaction in France surrounding the Touquet Treaty typifies this.

The Touquet Treaty, reached between the UK and France in 2003, permits each country to carry out passport checks on the other countries’ soil. It is what, according to French politicians in Calais, has accelerated the growth of the "Jungle", which currently accommodates close to 5,000 refugees.

Because the agreement was signed outside the auspices of the European Union, Brexit does not affect its legal legitimacy. However, for France, EU membership was crucial to the nature of the agreement. Speaking earlier this year, Harlem Desir, French Secretary of State for European Affairs, said the Touquet Treaty is “a bilaterial agreement. So, there will be no blackmail, nor threat, but it’s true that we cooperate more easily in both being members of the EU.”

Natacha Bouchart, mayor of Calais and a long-time critic of the treaty, has been vocal in her demands for legislative change since the result. Speaking to French broadcaster BGM TV, she said: “The British must take on the consequences of their choice. We are in a strong position to push, to press this request for a review and we are asking the President to bring his weight to the issue.” Some have adopted the slogan of the Leave campaign, telling them to now “take back control of your borders.”

Modification of the Touquet Treaty was branded part of ‘Project Fear’ by the Leave campaign. Because of this, change – if indeed it does happen – needs to be handled carefully by both the British and French governments.

The reaction of Natacha Bouchart is already a worrying sign for refugees. Firstly, it perpetuates the toxic narrative that casts refugees as an inconvenience. And secondly, any souring of relations between the UK and France over Brexit and the Touquet Treaty only increases the likelihood of refugees being used as political bargaining chips in the broader EU crisis over Schengen.

A divided government and disintegrating opposition do little to aid the situation. Furthermore, come October, how likely is a Brexit Tory cabinet – governing off the back of a manifesto predicated on reducing immigration – to extend the support networks offered to refugees? Even before the referendum, Theresa May, a supporter of the Remain campaign, said that Britain should withdraw from the European Convention on Human Rights, replacing it with the more questionable Bill of Rights.

Uncertainty of any kind is the most immediate danger to refugees. “Everyone is talking about it,” said Clare Mosesly, founder of Care4Calais. “But opinions on the impact are divided, which is creating yet more uncertainty.” Refugees, unsure whether Brexit will lead to increased fortification of the border, are prone to take ever more dangerous risks to reach the UK. Even economic uncertainty, seemingly distinct from issues such as the refugee crisis or immigration, has a negative impact. “The thing that worries me about a fragile economy”, said Paul Dillane, “is that when a country’s economy suffers, minorities suffer as well. Tolerance and inclusivity are undermined.”

The government must stress that the welcoming principles and legislation Britain had prior to Brexit remain in place. Andrej Mahecic, from the UNHCR, said “we will continue to rely on the UK’s strong support for humanitarian responses to refugee crises. Our work with the government on the UK’s asylum system and refugee resettlement schemes continues.”

The will from NGOs is there. The political will is less assured. In the aftermath of Brexit, the government must not concede to the darker side of the referendum debate.